(2 of )Associate winemaker Ross Reedy works on steaming French oak barrels to sanitize them for reuse at VML Winery in Healdsburg, California on Thursday, December 3, 2015. Truett-Hurst and former partner Bill Hambrecht are currently in a legal dispute over whether the winery can still lease the Westside Road property where its sister winery, VML, and 25 percent of its wine production are housed. (Alvin Jornada / The Press Democrat)

(3 of )Branded wine glasses are displayed in the tasting room at VML Winery in Healdsburg, California on Thursday, December 3, 2015. Truett-Hurst and former partner Bill Hambrecht are currently in a legal dispute over whether the winery can still lease the Westside Road property where its sister winery, VML, and 25 percent of its wine production are housed. (Alvin Jornada / The Press Democrat)

(4 of )Associate winemaker Ross Reedy works on steaming French oak barrels to sanitize them for reuse at VML Winery in Healdsburg, California on Thursday, December 3, 2015. Truett-Hurst and former partner Bill Hambrecht are currently in a legal dispute over whether the winery can still lease the Westside Road property where its sister winery, VML, and 25 percent of its wine production are housed. (Alvin Jornada / The Press Democrat)

Legal saga puts Truett-Hurst winery under harsh spotlight

It was only in 2011 when Bill Hambrecht teamed up with Phil Hurst in an unusual gambit in the wine world that was just coming out of the Great Recession: a business venture to grow wine brands under one umbrella and eventually go public as a company.

Using Hurst’s knowledge of the industry and Hambrecht’s financial resources, they formed a partnership with veteran winemaker Paul Dolan, a pioneer of environmentally conscious farming, and his son, Heath. Their company, Truett-Hurst Inc., set out to claim a stake among the largest wine companies that dominate the multibillion-dollar industry.

“Our goal is to aggressively build this company and take it where few wine companies have gone before,” Hambrecht said at the time.

Now five years later, after several rough patches for each man, Hurst and Hambrecht find themselves pitted against each other in court with significant outcomes for both.

For Hurst, president and chief executive officer at Truett-Hurst, the result could help determine the future of the Healdsburg vintner, which has suffered a series of significant losses that sent its stock tumbling to $1.59 a share as of Friday, down from nearly $4 a share year ago. It had been below $1 in recent weeks.

For Hambrecht — whose investment firm made millions of dollars by underwriting the initial public offering of companies such as Apple and Genentech — it likely represents a coda to a local wine industry career that has spanned more than 30 years. Once a high-profile financier for local winemakers, Hambrecht has mostly faded from the scene amid multiple lawsuits by employees who alleged he failed to pay them.

Noting he found that both sides are “good people,” wine industry analyst Joe Ciatti said the legal wrangling is a cautionary tale that shows success is not guaranteed in an industry that has grown steadily for more than two decades.

“It just points out there are a lot of people still struggling in the industry. Not everybody makes big money in it,” said Ciatti, a principal at Zepponi and Co.

The dispute came to the forefront this fall when the parent company of Truett-Hurst, H.D.D. LLC, filed suit on Nov. 9 in Sonoma County Superior Court against the Hambrecht Wine Group. Truett-Hurst is seeking to renew the lease on its Westside Road winery and tasting room, which is scheduled to lapse at the end of February.

The company makes about a quarter of its wine at the approximately 14-acre facility, which houses Truett-Hurst’s sister facility, VML, said Lewis Warren, the attorney representing H.D.D. In its complaint, H.D.D. said it would suffer an “extreme disruption of its business” if the lease was terminated.

Early days

The court case signals a significant falling-out between the company’s founders. In 2011, Hambrecht gave the company a five-year lease at the facility, which had once housed his now defunct Belvedere Winery. At the time, Hambrecht noted he owned 25 percent of the startup. Hurst labeled Hambrecht’s investment as a “multimillion-dollar deal.”

The company later went public in June 2013 through an auction process, a specialty Hambrecht developed for tech companies. Its stock sold for $6 a share during the IPO, well below the $11 to $15 originally sought by management.

Three months later, Truett-Hurst announced that Hambrecht would not stand for re-election to the board of directors. In the SEC filing, Hambrecht said he had “no disagreements with the company relating to the company’s operations, policies or practices” and would remain a long-term stockholder. Hurst said he looked forward to their “continued collaboration.”

Two years later, Hambrecht is now trying to revoke the lease by claiming the company was in default of various provisions in the contract, according to the complaint.

H.D.D. is asking for a judicial order to stop Hambrecht from not renewing the lease, set to expire Feb. 29. Instead, it wants to resolve the dispute through arbitration as called for in the contract.

In a filing with the Securities and Exchange Commission in October, Truett-Hurst said the dispute centered on its decision to withhold $33,000 from several monthly rental payments in 2011, 2013 and 2014, citing a disagreement over failure to provide water to the facility.

In its lawsuit, H.D.D. said it sent Hambrecht a $45,000 check for rent deductions made for the water and late charges, but it was rejected on Oct. 21 and Hambrecht moved to terminate the lease and requested that it vacate by Nov. 15 — a deadline the company ignored, according to Warren.

Hambrecht also alleged H.D.D. failed to comply with a subletting provision in the lease and did not submit production reports designed to determine whether it owed additional rent, according to SEC and court filings.

In response, H.D.D. argued in its court filing that the contract calls for it to pay additional rent if it exceeded 57,000 cases in annual production, which it has never reached.

Warren in an interview said that Hambrecht wants to terminate the lease so that he can sell the property for a higher value without Truett-Hurst around.

“I don’t think there is a snowball’s chance the lease will be terminated,” Warren said. “He negotiated that deal.”

Warren contends that H.D.D. has properly exercised its option to extend its lease for an additional five years, and that it has the right to match any offer on the property if Hambrecht wanted to sell the facility.

Hambrecht sued by others

As for Hambrecht, who turned 80 this year, he has slowly faded away from the wine industry. In 2011, Chris Donatiello split with Hambrecht as their venture to create small-lot, site-specific wines withered after four years. Other Hambrecht brands then later got swallowed into the Truett-Hurst umbrella.

But Hambrecht has been kept busy at the courthouse as a defendant in a number of lawsuits. Hambrecht was traveling and declined to comment for this story, according to an employee at his San Francisco investment bank.

For example, Hambrecht and his business entities have been sued by various employees. In 2012, viticulturist Warren Burton was awarded a $600,000 judgment for his work at Belvedere Winery, according to court records. Last June, Denise Sanders was awarded a $150,000 judgment for a lawsuit contending she was not paid under a profit-sharing plan, court records show.

In 2013, Hambrecht told The Press Democrat that his legal battles were not related to his decision to leave the Truett-Hurst board, adding that the lawsuits were “a long story, but it’s pretty well resolved.”

As he battled with lawsuits, Hambrecht sold his Floodgate Vineyard, but still retained the Westside Road property as part of the deal. It was unclear whether Hambrecht has unloaded his Truett-Hurst stock.

One more trouble

If Truett-Hurst loses its lease, it would serve as the latest blow for a company that has undergone a series of business and staffing setbacks of late, including the departure of its chief financial officer last year.

Its business model is made up largely around providing private and custom labels to large retailers such as Target and Kroger. The profit margins in such businesses are not that great, Ciatti noted. “Normally, that’s left to the devices of the big guys, who can do that type of thing,” he said.

Most notably, Truett-Hurst earlier this year posted $800,000 in charges for losses stemming from its Paper Boy brand, where manufacturing problems plagued the unique bottle mad of cardboard with a plastic liner.

The company was notified in January that some Paper Boy wines were past their shelf life and had partially oxidized. The U.K. manufacturer of the brand then filed for bankruptcy.

In September, it killed off its highly touted wine spritzer brand sold exclusively in Kroger stores because of poor sales, setting aside $500,000 for potential losses. In addition, it said it was taking a write-down of $400,000 for The Wine Spies, a flash sales website where it has partial ownership, after it experienced slumping sales in the fourth quarter.

In July, Truett-Hurst announced that it renewed its credit facility with the Bank of the West by an increase of $1 million up to an overall total of $10 million. CFO Paul Forgue said in a statement at the time the funding “exhibits confidence in our business model and allows us to continue delighting our customers with innovation and world-class wines.”

News Researcher Janet Balicki contributed to this article. You can reach Staff Writer Bill Swindell at 521-5223 or bill.swindell@pressdemocrat.com. On Twitter @BillSwindell.